A billionaire hedge fund guru has warned of a UK debt spiral hitting the economy if the current path is not altered.
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Ray Dalio, hedge fund founder and billionaire, warned that the UK economy was at risk of a “debt death spiral” after recent bond volatility. In an interview with the Financial Times, Dalio said the government faced having to continue borrowing more and more to service its existing debt.
“When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re in what the markets call a death spiral,” he said.
Dalio also warned that markets were not expecting the UK’s extra debt issuance in the wake of October’s Budget. Government debt issued is set to reach £297bn ($300bn) for this fiscal year, the second highest on record, with interest rates stuck at their highest levels in years.
The UK Treasury paid over £100bn to service its debt in the 2024 fiscal year, with servicing costs set to hit around £110bn by 2028-29.
“(This) looks like a debt death spiral in the making because it will either require more borrowing to service the debt that will have to be serviced, squeeze out other spending, or require more taxes,” Dalio added.
Daiwa Capital now expects the Bank of England to continue with slow interest rate cuts in 2025 and into 2026 with weakness in the UK labor market.
“Indeed, the current loss of momentum in economic activity and labour demand could intensify to significantly increase the risks that inflation will undershoot the target over the medium term. So, we still expect the BoE to continue to cut rates gradually, by 25bps a quarter in 2025 and H126,” analysts at the firm said.
There was further gloom on Wednesday with data showing borrowing rose more than expected in December to its highest in four years, piling more pressure on the UK’s finances. Borrowing of £17.8bn last month, was higher than the previous December high of £10.1bn.
Spending on public services, social benefits, and debt interest were all up over the year, while an increase in tax gains was offset by cuts to National Insurance brought by the previous government.
